It was the fourth call in a week on the same topic from a buyer at one of our retail clients: “I’ve literally received 40 cost increases from my suppliers in the last two weeks alone. I feel like I’m under attack and they are piling on,” she told me. “Some of them probably are,” I replied, “so, what are you going to do about it?”
In a time of rising supply chain, transportation and raw material cost volatility, retail buyers are seeing significant cost increases from their suppliers. Some of them are legitimate – others not. However, most buyers I speak with simply take the cost increase and move on. “It is what it is,” they tell me, “what can I do?”
Buyers should understand this is exactly what suppliers are counting on. Suppliers know they won’t get everything they demand from every retailer, nor will most buyers seek much of anything in return for the cost increase. However, suppliers do know they will get enough of what they need from those retailers unprepared or unwilling to negotiate. What I know from experience is that if you are not negotiating, your competitors certainly are, and you are at a succinct disadvantage.
Naturally, the best outcome would be to head off the increase right from the start. To do this, buyers should first ask the supplier “are you sure?” Actions have consequences. A cost increase changes the profitability of the assortment, particularly if retail prices don’t move or stick. It could also place the retailer at a disadvantage depending on the moves made by competitors. Therefore, buyers should remind their suppliers that any cost increase could result in a reduction in skus, space or other assets like digital placement, endcaps and promotional opportunities, all leading to a decrease in sales. It could also trigger a complete line review of the assortment where the supplier could lose or decrease its business with the retailer. Is this an action the supplier really wants to take? Asking “are you sure” often gets the supplier to back off.
If the supplier is still demanding a cost increase, the next step is to ask them to "legitimize and minimize.” Buyers should ask for a cost breakdown to understand if the demand is legitimate or too high. Ask them how they came to the new cost. Ask them what actions they are taking to minimize the cost increase, and when you might see a return to the lower cost when commodity pricing lowers. At one of our retail clients, a supplier asked for a 20% increase in cost due to a 20% rise in the cost of a key ingredient. However, this ingredient made up only 25% of the total product cost. We asked them to reevaluate and get creative on how they could reduce some of their own overall costs. Ultimately, the supplier withdrew the request.
If these actions still don’t produce the desired result, buyers should remember this is a negotiation, and in any negotiation, each side has to give something in in order to get something. Buyers should be asking the supplier, “what am I getting in return for giving you this increase?” In a recent case, one of our buyer clients was able to negotiate additional funding at a level that would keep them margin whole for 6 months while the parties monitored how the market would react to the cost and retail price increase.
Finally, buyers may want to consider opening up the negotiation more broadly by conducting a complete line review of their assortment. If cost increases are eroding sales and/or profitability, it may be time to reassess the category. In one case, a retail client put up its entire assortment for review when it received significant cost increase demands from its primary supplier. At the end of the review, the primary supplier lost significant business and the buyer achieved a 3% overall decline in costs. The buyer was able to lower retails and saw an increase in sales.
In sum, cost increase demands are not the end of the discussion. It is the beginning of a negotiation. First, explain the potential consequences of a cost increase on the supplier’s business and future sales. Second, ask the supplier to “legitimize and minimize” any increase. Third, prepare for and engage in a negotiation where you get something in return. Finally, consider a complete renegotiation of your assortment. There is a lot a buyer can do, and it never should end with an “it is what it is.”